April 12, 2024: Trouble Brewing in Financial Asset Wonderland

April 12, 2024: Trouble Brewing in Financial Asset Wonderland
Doug Noland Posted on April 13, 2024

Unique “global government finance Bubble” dynamics some years back compelled an adjustment to one of my favorite maxims. Instead of doubling, Bubbles inflate to unimaginable extremes – and then quadruple.

Bubbles can inflate for a long time, sustained by loose financial conditions and government rescues. There will always be ebbs and flows. Scares and shocks occasionally evoke fears of bursting Bubbles. And the more these bouts of instability are rectified by inflationist central banking, the less concern for Bubble dynamics. That which does not destroy a Bubble only makes it stronger.

Late in the cycle, “Terminal Phase” excess takes over, with a confluence of rapid Credit expansion, intense speculation, and FOMO completely sidelining Bubble concerns. I like to underscore that the colorful historical accounts of manias don’t do reality justice. It’s not about crowds of raving mad speculators bidding up tulip bulb prices to the stratosphere. Late-cycle FOMO is altogether more rational. After so many years, arguing that prices don’t always recover to new highs is borderline insanity. Moreover, underlying fundamentals are an elemental facet of Bubble inflations, with surging profits, cash flows and incomes validating inflating asset prices and bullish narratives more generally.

In a fatefully ironic late-cycle dynamic, fear of missing out completely usurps Bubble concerns right before the inevitable reckoning. Bubbles eventually burst – and they have this innate diabolical propensity to somehow catch the over-exposed masses by surprise, causing the greatest damage to the largest number of traders, individuals, institutions, businesses, and governments. Only days before the 1929 stock market cataclysm, eminent – and soon to be penniless – Yale economist (and speculator) Irving Fisher infamously stated, “The nation is marching along a permanently high plateau of prosperity.”

The past week beckons for some Bubble theory rehash. There’s a decent case to be made that the global Bubble today hangs precariously in the balance. March CPI data confirm U.S. inflation is decidedly not on a glide path to kindly return to 2% anytime soon. The Fed’s misguided dovish pivot unleashed precariously loose market conditions, stoking wild speculative excess while ensuring inflation became deeply embedded. The jam-packed stock market easy “money” party now risks being crashed by “higher for longer,” a confounded Federal Reserve, and heightened global instability.

We don’t want to overly fixate on the Fed’s quandary. Odds are down to only two-thirds probability of a rate cut by the July 31st FOMC meeting. At 4.86% (up 19bps post-CPI), the rates market ended the week pricing about two cuts (47bps) by the December 18th meeting. Markets are not expecting much activity from the Fed for a few months.

Two key central banks are under much more immediate market pressure. Our friends in Tokyo and adversaries in Beijing both face acute currency vulnerability, pressure made significantly more intense by U.S. Bubble dynamics (i.e. loose conditions, “higher for longer,” and booming markets).

The Dollar Index gained 1.6% this week, almost all of the gain following Wednesday morning’s disappointing CPI report. The dollar ended the week at a five-month high. Bloomberg: “Dollar Caps Best Run in 18 Months on Fed Rethink, Haven Bid.” The yen dropped another 1.1% to a new 34-year low.

April 11 – Bloomberg (Erica Yokoyama and Emi Urabe): “Japan warned that it will consider all options to combat weakness in the yen after the currency slumped to its weakest level against the dollar since 1990. Following weeks of flirting with the closely watched 152 level versus the greenback, the yen blew straight through this mark on Wednesday and all the way to 153 as US inflation data reverberated through global markets. That’s put traders on alert for intervention by Japanese authorities, whose jawboning of markets has done little to change the downward momentum. ‘Whether this involves currency intervention or not, we authorities are prepared for all situations all the time,’ Masato Kanda, Japan’s top currency official, told reporters Thursday morning.”

Understandably, tough-talking Japanese officials are reluctant to start a fight with the markets. After all, unsuccessful currency intervention would only embolden the speculators. And it’s reasonable that the BOJ today worries more about a big bond market blowup than their weak currency. A Friday Bloomberg headline: “Japan’s 5-Year Yield Climbs to Highest Since 2011 Amid BOJ Bets.”

Japan teeters today uncomfortably close to a nightmare scenario of unsuccessful yen support, disorderly currency devaluation, and destabilizing bond market adjustment. “Nightmare” is appropriate because of the risk that intervention to stabilize the bond market would generate liquidity to further pressure the yen.

There are said to be large option hedging positions struck at the 152 yen/dollar level, derivatives that raise the odds of disorderly trading. There are also massive (Trillions?) yen “carry trades” – levered speculations that have worked marvelously throughout yen devaluation, yet turn problematic in a backdrop of acute currency instability and global de-risking/deleveraging.

April 10 – Financial Times (Demetri Sevastopulo and Kana Inagaki): “The US and Japan plan to modernise their military command and control structures in what President Joe Biden said was the ‘most significant’ upgrade to their alliance since it was created decades ago. Speaking alongside Japanese Prime Minister Fumio Kishida…, Biden said the allies were taking significant steps to ensure their militaries could ‘work together in a seamless and effective way’. The US president added that the two countries had transformed their relationship into a ‘truly global partnership’ over the past three years, and that the alliance now served as a ‘beacon to their entire world’.”

More irony. President Biden and Prime Minister Kishida were deep into strategic planning this week, fixated on the rising threat from Xi’s China (and friends). In the near-term, the enemy of my enemy dynamic would suggest that Xi befriend Kishida, with both countries facing the growing threat of hostile market aggression.

If there was one critical lesson learned from the devastating 1997 Asian Tiger Bubble collapses, it was that pegged currencies should be avoided at all cost. Well, Beijing of late has virtually hard-pegged the renminbi to the dollar. Chinese officials don’t prefer a strong currency. A weaker renminbi would bolster their massive export sector. But when the PBOC somewhat lowered the renminbi trading band a few weeks back, all hell almost broke loose.

April 7 – Bloomberg (Tania Chen): “China stuck to a pattern of keeping yuan weakness contained as pressure from a resilient dollar and poor investor sentiment pushes it toward a policy red line… The PBOC has stepped in aggressively to stabilize the yuan on each of the five occasions it neared that policy red line in past years. It has adopted tools ranging from verbal warnings to boosting the cost of short wagers against the currency. The yuan has never moved outside of its permitted range in history. So there is little guidance on what may happen to China’s spot market if the currency tries to touch the weak end this time around.”

Beijing has been forced into a hard currency peg to avoid the slightest indication of losing control. The certainty afforded by pegs is accommodative to speculative flows and levered speculation. But pegs under pressure demand tough decisions. The hope is always that some moral suasion (intervention threats) and financial resources (international reserves) buy time for a return to relative stability. It’s a gamble where the stakes compound over time.

Forces can materialize that thwart any return to stability – such as U.S. inflationary pressures, a Fed forced into “higher for longer,” spacious interest-rate differentials, and a dollar melt-up.

Beijing now faces the wretched decision of how long to cling to a peg that appears increasingly untenable. As was the case in Asia in the nineties, circumstances can evolve into the classic throwing good “money” after bad. How much of China’s international reserve position is Beijing willing to fritter away while accommodating myriad players – from Chinese savers to international speculators and investors to domestic institutional flows – anxiously seeking an exit?

Meanwhile, as Beijing seeks to limit the scale of reserves expended, it has called upon its bloated banks to lend support to the renminbi. In the process, China’s banking system accumulates large dollar short positions and likely massive derivatives exposures. So long as the hard peg holds, a semblance of stability endures. Stealthily, however, potentially cataclysmic risk mounts below the surface.

The longer the hard peg is maintained, the greater the risk of a derivatives-related market dislocation if the peg is relaxed. Countries prefer managed currency devaluations, aka measured adjustments to the peg. But markets, recognizing that the first is rarely the last, tend to move aggressively upon any announcement of wider trading bands or incremental devaluation. Hedging operations become only more urgent, raising the odds of a disorderly adjustment period.

How they might decide to play this predicament is unclear and critically important. Beijing has certainly not helped its cause. Desperately attempting to defy Bubble dynamics with a 5% GDP target ensures ongoing epic Credit excess and malinvestment. China’s Aggregate Financing expanded $675 billion during March and $4.700 TN y-o-y, nonproductive Credit growth without precedent. Moving forward brazenly with plans for a dominant global currency and international superpower status – despite a collapsing Bubble – creates about the most unsettled backdrop imaginable.

China’s historic apartment Bubble deflation is at the cusp of taking a turn for the worse.

April 12 – Bloomberg: “Concern is intensifying over state-backed China Vanke Co.’s ability to stave off default, defying efforts by authorities to shore up the cash-strapped developer’s finances. The company’s stocks and bonds tumbled this week, leading an industrywide selloff, after S&P Global Ratings became the third major ratings company to cut the developer to junk territory… Vanke, long considered among China’s most creditworthy property giants, is one of the few to avoid default. ‘Vanke is an icon of China’s real estate industry,’ said Yu Yingdong, general manager at Shenzhen Cowin Asset Management Ltd. ‘If a company like this can face such problems, it will only increase concern about the industry’s outlook.’ Vanke’s shares tumbled 13%… this week in their biggest loss since 2021, and closed at a decade-low. A dollar bond due 2027 traded below 40 cents on the dollar, headed for its lowest level on record…”

Beijing has responded to its apartment Bubble collapse by doubling down on exports – notably EV, solar panels, batteries, and renewable technologies.

April 12 – Reuters (Ellen Zhang and Joe Cash): “China’s exports contracted sharply in March while imports unexpectedly shrank, undershooting forecasts by big margins, highlighting the stiff task facing policymakers as they try to bolster a shaky economic recovery. The dour data represented a setback for the world’s second-largest economy… Exports from China slumped 7.5% year-on-year last month by value…, the biggest fall since August last year and compared with a 2.3% decline forecast in a Reuters poll of economists. They had risen 7.1% in the January-February period…”

Global demand for EVs has weakened just as China ramps up manufacturing capacity. Meanwhile, global pushback against the great Chinese export machine gains momentum.

April 8 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen warned China… that Washington will not accept new industries being decimated by Chinese imports, as she wrapped up four days of meetings to press her case for Beijing to rein in excess industrial capacity. Yellen told a press conference that U.S. President Joe Biden would not allow a repeat of the ‘China shock’ of the early 2000s, when a flood of Chinese imports destroyed about 2 million American manufacturing jobs.”

Beijing is rapidly losing flexibility. Desperate measures to grow out of Bubble problems risk burying its banking system in crummy loans, while impairing the global standing of Chinese government debt. The world is watching.

April 9 – Reuters (Joe Cash, Kevin Yao, Ellen Zhang and Akanksha Khushi): “Fitch cut its outlook on China’s sovereign credit rating to negative…, citing risks to public finances as the economy faces increasing uncertainty in its shift to new growth models. The outlook downgrade follows a similar move by Moody’s in December and comes as Beijing ratchets up efforts to spur a feeble post-COVID recovery… ‘Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt,’ said Gary Ng, Natixis Asia-Pacific senior economist. ‘This does not mean that China will default any time soon, but it is possible to see credit polarization in some LGFVs (local government financing vehicles), especially as provincial governments see weaker fiscal health.’”

We’re witnessing the world split in real time. The Biden administration hosts Prime Minister Kashida and Philippine President Ferdinand Marcos Jr., while Canada and New Zealand voice interest in joining the AUKUS security pact. Meanwhile, “Russia, China to Work on ‘Double Counteracting’ US-Led Alliance,” with Russian Foreign Minister Sergei Lavrov in Beijing this week for high-level talks. CNN: “China is Sending its Highest-Level Delegation to North Korea Since 2019 to Kick Off a ‘Friendship Year’.” “China Slams US-Japan-Philippines Summit, Defends Actions in South China Sea.”

It’s a reasonable bet that financial flows will continue their split from China. Currently, it is a challenge to envisage an environment conducive to foreign investment returning to China. Short-term and longer, the renminbi peg to the dollar appears indefensible. A disorderly devaluation with major global ramifications is not a low-probability scenario.

Risk aversion is gaining momentum throughout Asia. The South Korean won declined another 1.7% this week, boosting its one-month drop to 4.7%. The Singapore dollar declined 0.9% (down 2.1% over a month), the Taiwanese dollar 0.7% (2.7%), and the Malaysian ringgit 0.5% (1.9%). Over the past month, Thai baht has dropped 2.8%, the Philippine peso 2.2%, and the Indonesia rupiah 1.6%.

Friday trading saw the first inkling of de-risking/deleveraging in a while. Gaining 0.7%, the Dollar Index closed Friday above 106 for the first time since November 2nd. The VIX (equities volatility) Index traded intraday to 19.2 (closed at 17.31), the high since October 31st. The MOVE bond market volatility index traded to the high (112bps) since February 22nd. JPMorgan CDS rose three Friday to 45 bps, as major bank CDS posted their largest one-day gains since October. Dropping 3.75%, the KBW Bank Index suffered its largest weekly loss since September.

Gold prices spiked Friday to an all-time high $2,432, before reversing sharply back to a $2,344 close. Silver surged to a three-year high of $29.79, only to close at $27.88. Copper prices rose Friday to a new 14-month high, as the Bloomberg Commodities Index traded to highs since early November. Platinum surged 5.0% this week. Hard assets seem to sense Trouble Brewing in Financial Asset Wonderland.

Ten-year Treasury yields closed Thursday trading at 4.59%, the high since November 13th. Fledgling risk off saw Treasury yields reverse lower in Friday trading, with 10-year yields ending the session at 4.52%. Benchmark MBS yields closed the week up 23 bps to 6.02% – trading this week to the highs since November 24th.

High yield CDS jumped 16.5 bps this week, the largest weekly gain since October. High yield spreads widened seven bps, also the biggest increase back to October. JPMorgan CDS rose five to 45 bps, as most U.S. bank CDS prices posted their strongest weekly gains since the first week of the year.

European bank (subordinated) CDS rose eight this week to 122 bps; European high yield (“crossover”) CDS surged 26 to 325 bps; and EM CDS rose nine to 179 bps – all three the largest weekly jumps since early January.

April 12 – Wall Street Journal Gordon Lubold, Benoit Faucon and Dov Lieber): “The U.S. rushed warships into position to protect Israel and American forces in the region, hoping to head off a direct attack from Iran on Israel that could come as soon as Friday or Saturday. The moves by the U.S. that are part of an effort to avoid a wider conflict in the Middle East came after a warning from a person familiar with the matter about the timing and location of the potential Iranian attack… Army Gen. Erik Kurilla, the head of U.S. Central Command, discussed a possible Iranian attack with Israeli Defense Minister Yoav Gallant in Israel on Friday. ‘We are prepared to defend ourselves on the ground and in the air, in close cooperation with our partners, and we will know how to respond,’ Gallant said…”

Perhaps the Chinese can convince the Iranians to stand down – for now. Yet it seems global tensions have escalated (on multiple fronts) to the point where markets can no longer disregard geopolitical risk. I’ll be surprised if the past week doesn’t mark a shift from risk embracement to risk aversion, with Friday likely the onset of problematic de-risking/deleveraging dynamics. A backdrop of market instability (currencies, bonds, equities, and commodities), geopolitical hostility, and acute uncertainty is not conducive to levered speculation.

For the Week:

The S&P500 fell 1.6% (up 7.4% y-t-d), and the Dow lost 2.4% (up 0.8%). The Utilities declined 1.5% (up 2.1%). The Banks sank 3.7% (up 2.1%), and the Broker/Dealers slumped 3.1% (up 4.8%). The Transports were hit 2.6% (down 2.5%). The S&P 400 Midcaps dropped 3.0% (up 4.2%), and the small cap Russell 2000 lost 2.9% (down 1.2%). The Nasdaq100 declined 0.6% (up 7.0%). The Semiconductors fell 1.5% (up 13.6%). The Biotechs slumped 2.4% (down 6.5%). While bullion gained $15, the HUI gold index declined 0.8% (up 8.1%).

Three-month Treasury bill rates ended the week at 5.2225%. Two-year government yields jumped 15 bps this week to 4.90% (up 65bps y-t-d). Five-year T-note yields rose 16 bps to 4.56% (up 71bps). Ten-year Treasury yields gained 12 bps to 4.52% (up 64bps). Long bond yields rose eight bps to 4.63% (up 60bps). Benchmark Fannie Mae MBS yields surged 23 bps (2-week rise of 41bps) to 6.02% (up 75bps).

Italian yields declined six bps to 3.76% (up 6bps y-t-d). Greek 10-year yields slipped a basis point to 3.43% (up 38bps). Spain’s 10-year yields declined five bps to 3.18% (up 19bps). German bund yields fell four bps to 2.36% (up 34bps). French yields declined four bps to 2.87% (up 31bps). The French to German 10-year bond spread was unchanged at 51 bps. U.K. 10-year gilt yields rose seven bps to 4.14% (up 60bps). U.K.’s FTSE equities index rallied 1.1% (up 3.4% y-t-d).

Japan’s Nikkei Equities Index gained 1.4% (up 18.1% y-t-d). Japanese 10-year “JGB” yields jumped seven bps to 0.86% (up 24bps y-t-d). France’s CAC40 slipped 0.6% (up 6.2%). The German DAX equities index fell 1.3% (up 7.0%). Spain’s IBEX 35 equities index dropped 2.1% (up 5.8%). Italy’s FTSE MIB index declined 0.7% (up 11.2%). EM equities were mostly lower. Brazil’s Bovespa index slipped 0.7% (down 6.1%), and Mexico’s Bolsa index dropped 2.6% (down 1.4%). South Korea’s Kospi index fell 1.2% (up 1.0%). India’s Sensex equities was unchanged (up 2.8%). China’s Shanghai Exchange Index fell 1.6% (up 1.5%). Turkey’s Borsa Istanbul National 100 index gained 2.0% (up 31.4%). Russia’s MICEX equities index rose 1.8% (up 11.5%).

Federal Reserve Credit declined $25.0bn last week to $7.402 TN. Fed Credit was down $1.488 TN from the June 22nd, 2022, peak. Over the past 239 weeks, Fed Credit expanded $3.675 TN, or 99%. Fed Credit inflated $4.591 TN, or 163%, over the past 596 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $13.8bn last week to $3.359 TN. “Custody holdings” were up $28.3 billion y-o-y, or 0.8%.

Total money market fund assets declined $31bn to $6.080 TN. Money funds were up $833 billion, or 15.9%, y-o-y.

Total Commercial Paper declined $6.3bn to $1.330 TN. CP was up $184bn, or 16.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose six bps to 6.88% (up 54bps y-o-y). Fifteen-year rates jumped 10 bps to 6.16% (up 55bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 16 bps to a four-month high 7.50% (up 64bps).

Currency Watch:

April 10 – Bloomberg (Tania Chen and Carter Johnson): “China watchers calling for Beijing to loosen its grip on the besieged yuan need to be mindful of the risk that it unleashes a chain reaction rocking emerging- and developed-market currencies alike… Most under threat are the currencies of Asian neighbors such as South Korea and Thailand, where China is the number one trading partner. But a suddenly weaker yuan may have a much wider impact, turbocharging renewed strength in the dollar, the traditional wrecking ball for developing nations’ foreign-exchange markets. China’s managed currency is seen as an anchor for its regional peers, meaning small moves can have an outsized impact.”

April 11 – Bloomberg (Mark Cranfield): “The cost of shorting the yuan in China continues to get cheaper, which is making the PBOC’s job of keeping the currency in a tight range even more difficult. One-year CNY forward points show the deepest discount since 2008… FX traders can effectively sell CNY around 6.9570 for a 1-year outright, even though the spot rate is above 7.23.”

April 12 – Bloomberg: “The premium to borrow dollars in China’s local markets has jumped over the past month, another example of the resurgent US currency’s global reach and persistent headwinds facing the yuan. China’s overnight interbank dollar lending rate hit a record 5.47% on March 29 after a steady climb, before easing to 5.42% Thursday… ‘The gap hinting at an imbalance between supply and demand for dollar liquidity points to pressure on the yuan,’ said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group.”

April 3 – Bloomberg: “Onshore yuan spot trades with T+0 and T+1 settlements were halted after the currency slid near the weak end of the trading band for today, according to traders who asked not to be identified… Some proprietary desks of banks and corporate clients are actively engaged in arbitrage trade in spot and forward in both onshore and offshore markets…”

April 9 – Bloomberg (Greg Ritchie): “Talk of the euro touching parity with the dollar is returning as policymakers at the European Central Bank look primed to deliver more interest-rate cuts this year than their US peers. Lenders including Bank of America Corp. and Germany’s LBBW are wargaming a variety of tail risks and warn of euro weakness ahead if wagers on the differing pace of rate cuts at the ECB and the Federal Reserve play out.”

For the week, the U.S. Dollar Index gained 1.7% to 106.038 (up 4.6% y-t-d). For the week on the downside, the Swedish krona declined 2.3%, the euro 1.8%, the Australian dollar 1.7%, the South Korean won 1.7%, the Norwegian krone 1.6%, the British pound 1.5%, the Canadian dollar 1.3%, the Swiss franc 1.3%, the New Zealand dollar 1.2%, the Mexican peso 1.2%, the Japanese yen 1.1%, the Brazilian real 1.0%, the Singapore dollar 0.9%, and the South African rand 0.9%. The Chinese (onshore) renminbi declined 0.06% versus the dollar (down 1.90% y-t-d).

Commodities Watch:

April 7 – Bloomberg (Jessica Zhou): “China’s central bank purchased gold for its reserves for a 17th straight month in March, extending a buying spree that has helped the precious metal surge to a record. Bullion held by the People’s Bank of China rose 0.2% to 72.74 million troy ounces last month… It’s the smallest increase in the run of monthly purchases that began in November 2022… Central bank buying has also been a significant driver of its strength since 2022. Global central banks, led by China and India, continued adding to their gold reserves in February, marking a ninth straight monthof growth, according to the World Gold Council.”

April 10 – Bloomberg: “Chinese investors are snapping up stocks tied to high-flying metals from copper to gold, aiding an onshore market facing an uphill battle to cement a nascent rebound. A gauge tracking resources firms listed in Shanghai and Shenzhen has gained 10% in the past month, becoming the best sub-index of the CSI 300 benchmark. Zijin Mining Group Co., a major gold and copper producer, and Shandong Gold Mining Co. have led the rally and both gained over 20% in this period.”

April 7 – Bloomberg (Charlotte Yang): “An exchange-traded fund that owns gold companies has become the latest target of frenzied trading in China as investors pile into corners of the market seen as resilient to the country’s economic challenges. Trading for the ChinaAMC CSI SH-SZ-HK Gold Industry Equity ETF was halted until 10:30 a.m Monday local time, in order to protect investors’ interests, China Asset Management Co. said… It was the second trading suspension for the product since last Tuesday. The decision came after the fund’s premium over its underlying assets increased to more than 30% as of April 3, the highest on record…”

April 9 – Wall Street Journal (Bob Henderson): “A surge in prices for the raw materials that power manufacturing and transportation shows investors betting on a prolonged expansion—and a potential rebound in inflation. An index of global commodities prices, the S&P GSCI, has advanced 11% this year, outpacing the S&P 500’s 9.2% climb. Copper and oil have gained more than 10% and 16%, respectively. Even gold is posting fresh records, rising 14% to a new high of $2,343.50 a troy ounce.”

April 10 – Financial Times (Stephanie Stacey): “Industrial metals including copper and zinc have outperformed global stocks this year as signs of a revival in demand from Chinese manufacturers add to concerns over tighter global supply. An index tracking the performance of six industrial metals on the London Metal Exchange has climbed 8% since the start of 2024… The index, which also includes lead, aluminium, tin and nickel, has risen sharply this month…”

April 9 – Bloomberg (Alex Longley and Jack Farchy): “The world’s biggest commodity traders are increasingly confident of a bullish oil market into the second half of the year after prices pierced $90 a barrel for the first time in months. At an annual gathering in Lausanne on the shore of Switzerland’s Lake Geneva, some of the most senior figures in commodities markets lined up to paint an optimistic outlook for demand — and prices — later this year.”

The Bloomberg Commodities Index was little changed (up 4.3% y-t-d). Spot Gold added 0.6% to $2,344 (up 13.6%). Silver gained 1.5% to $27.88 (up 17.2%). WTI crude retreated $1.25, or 1.4%, to $85.66 (up 20%). Gasoline added 0.5% (up 33%), while Natural Gas slipped 0.8% to $1.77 (down 30%). Copper added 0.5% (up 10%). Wheat dropped 2.0% (down 12%), while Corn increased 0.3% (down 8%). Bitcoin declined $670, or 1.0%, to $66,950 (up 58%).

Middle East War Watch:

April 10 – Bloomberg (Donato Paolo Mancini, Jennifer Jacobs and Galit Altstein): “The US and its allies believe major missile or drone strikes by Iran or its proxies against military and government targets in Israel are imminent, in what would mark a significant widening of the six-month-old conflict, according to people familiar with the intelligence. The potential assault, possibly using high-precision missiles, may happen in the coming days, the people said… It is seen as more a matter of when, not if, one of the people said, based on assessments from US and Israeli intelligence.”

April 8 – Associated Press (Kareem Chehayeb and Albert Aji): “Iran’s foreign minister… accused the United States of giving Israel the ‘green light’ for a strike on its consulate building in Syria that killed seven Iranian military officials including two generals. Hossein Amirabdollahian reiterated Tehran’s vows that it will respond to the attack… that appeared to signify an escalation of Israel’s targeting of military officials from Iran, which supports militant groups fighting Israel in Gaza, and along its border with Lebanon. Hezbollah leader Hassan Nasrallah in an address Monday reiterated the Iran-backed group’s support for a Tehran military response to the attack that killed Gen. Mohammad Reza Zahedi…”

April 8 – Financial Times (James Shotter): “Benjamin Netanyahu said Israel had set a date for an assault on Rafah, after far-right allies warned that his premiership would not be tenable if he did not launch an attack on the town in southern Gaza. The US has in recent weeks increasingly put public pressure on Netanyahu not to carry out a major operation in Rafah, which has become Hamas’s last stronghold, but which is also sheltering more than 1mn people displaced by fighting elsewhere in the devastated enclave.”

April 11 – Reuters (James Mackenzie and Nidal Al-Mughrabi): “Israel is keeping up its war in Gaza but is also preparing for scenarios in other areas, Prime Minister Benjamin Netanyahu said…, amid concern that Iran was preparing to strike Israel in response for the killing of senior Iranian commanders. ‘Whoever harms us, we will harm them. We are prepared to meet all of the security needs of the State of Israel, both defensively and offensively,’ he said…”

April 9 – Reuters (Maya Gebeily): “The killing of a local politician has deepened sectarian and political faultines in Lebanon, raising fears of armed clashes between rival factions in a country already beset by a deep economic crisis, and cross-border shelling linked to the Gaza War. Government and religious officials have rushed to quell tensions after the killing of Pascal Sleiman prompted fears of renewed street brawls between rival parties… Sleiman headed the anti-Hezbollah Lebanese Forces Party in a predominantly Christian coastal area.”

Ukraine War Watch:

April 11 – Reuters: “The Russian defence ministry said… it hit fuel and energy complex facilities in Ukraine with a ‘massive’ retaliatory strike using high-precision, long-range weapons from air and sea as well as drones overnight. The strikes were in response to Ukrainian efforts to damage Russia’s oil and gas industry and energy facilities, the ministry said.”

April 6 – Reuters (Tom Balmforth and Yuliia Dysa): “Ukraine could run out of air defence missiles if Russia keeps up its intense long-range bombing campaign, President Volodymyr Zelenskiy warned in remarks aired on Saturday. The Ukrainian leader’s starkest warning to date of the deteriorating situation faced by his country’s air defences follows weeks of Russian strikes on the energy system, towns and cities using a broad arsenal of missiles and drones.”

April 8 – Reuters (Guy Faulconbridge and Francois Murphy): “Russia said Ukraine struck the Zaporizhzhia nuclear power station controlled by Russian forces three times on Sunday and demanded the West respond, though Kyiv said it had nothing to do with the attacks. The International Atomic Energy Agency (IAEA) has long warned of the risks of a disaster at Zaporizhzhia, Europe’s largest nuclear plant, and urged an end to fighting in the area.”

Taiwan Watch:

April 10 – Reuters: “Chinese President Xi Jinping told former Taiwan President Ma Ying-jeou… that outside inference could not stop the ‘family reunion’ between the two sides of the Taiwan Strait, and that there are no issues that cannot be discussed. Since the defeated Republic of China government fled to Taiwan in 1949 after losing a civil war to Mao Zedong’s communists, no serving Taiwanese leader has visited China. Ma, president from 2008 to 2016, last year became the first former Taiwanese leader to visit China, and is now on his second trip to the country, at a time of simmering military tension across the strait.”

Market Instability Watch:

April 10 – Bloomberg (Viktoria Dendrinou): “The US budget deficit widened in the six months through March as higher debt-servicing costs continued to be a key driver of the gap. The deficit for the first half of the 2024 fiscal year reached $1.07 trillion. Adjusted for calendar differences, the gap was 4% greater than the one recorded in the same period in the prior year… The deficit for the month of March was $236 billion… Interest costs in the first half of the fiscal year were $522 billion, a 36% jump from 2023.”

April 12 – Bloomberg (Allegra Catelli, Kriti Gupta and Anna Edwards): “Government debt has exploded to levels that are more concerning than it was before the bankruptcy of Lehman Brothers Holdings Inc. in 2008, according to former European Central Bank chief Jean-Claude Trichet. Trichet also pointed to the soaring debt levels as a warning sign for stock markets teetering at all-time highs. ‘I don’t want to be too negative, but I am circumspect,’ Trichet said…, citing that debt in advanced economies has risen to 114% of gross domestic product, compared with 75% before the global financial crisis. ‘I am worrying on the stock market on both sides of the Atlantic, taking into the account the present dangerosity of the economic and financial sphere,’ he added.”

April 9 – Reuters (Saqib Iqbal Ahmed and Suzanne McGee): “Popular funds that sell options for income may be moderating the recent bout of volatility in U.S. stocks, extending the calming effect they have had on the market for the last several months. Assets under derivative income ETFs, funds that use a mix of stock and stock derivatives to generate income, have grown to about $71 billion from $33 billion at the end of 2022… Some options mavens believe these funds and other options-selling strategies have tempered stock gyrations… The Cboe Volatility Index, Wall Street’s ‘fear gauge’, in late March fell to its lowest in two months, as strong earnings and expectations of rate cuts this year sent stocks marching higher.”

April 8 – Associated Press (Ken Sweet): “The nation’s most influential banker, JPMorgan… CEO Jamie Dimon, told investors… he continues to expect the U.S. economy to be resilient and grow this year. But he worries geopolitical events including the war in Ukraine and the Israel-Hamas war, as well as U.S. political polarization, might be creating an environment that ‘may very well be creating risks that could eclipse anything since World War II.’ The comments came in an annual shareholder letter… ‘America’s global leadership role is being challenged outside by other nations and inside by our polarized electorate… We need to find ways to put aside our differences and work in partnership with other Western nations in the name of democracy. During this time of great crises, uniting to protect our essential freedoms, including free enterprise, is paramount.’”

April 8 – Financial Times (Joshua Franklin and Mary McDougall): “JPMorgan Chase chief executive Jamie Dimon has warned that US inflation and interest rates could remain higher than markets expect because of high government spending… ‘It is important to note that the economy is being fuelled by large amounts of government deficit spending and past stimulus… There is also a growing need for increased spending as we continue transitioning to a greener economy, restructuring global supply chains, boosting military expenditure and battling rising healthcare costs.’”

Global Credit Bubble Watch:

April 8 – Bloomberg (Ellen Schneider): “Regulators should scrutinize the fast-growing private-credit market more closely, given potential concerns ranging from demands on funds’ liquidity to the quality of underlying borrowers, the International Monetary Fund said… The study, …as part of an IMF report on global financial stability, outlines the $1.7 trillion sector’s critical role in debt markets, and points to possible risks which are difficult to fully ascertain given the lack of information and transparency. Private credit also remains largely untested in an economic slump, according to the analysis. It caters to mostly small and mid-size borrowers with higher leverage, implying more risk.”

April 9 – Bloomberg (Allison McNeely and Dawn Lim): “Blackstone Inc. intends to borrow more than $1 billion against investments in an older private equity fund as a once-unorthodox form of lending gains traction among the biggest money managers. The firm has explored borrowing on a so-called net-asset-value loan backed by deals in its $18 billion flagship private equity fund that debuted in 2016, according to people with knowledge of the matter.”

Bubble and Mania Watch:

April 7 – Wall Street Journal (Dan Gallagher): “Having more money than you know what to do with used to be a high-quality problem. Now it is just a problem. The largest tech companies in the world are also the richest. Apple, Amazon, Microsoft and the parent companies of Google and Facebook now collectively sit on a little more than $570 billion in cash, short-term and long-term investments. That is more than double the collective pile of the next five richest nonfinancial companies on the S&P 500 index, according to… S&P Global Market Intelligence.”

April 9 – Financial Times (Steve Johnson): “Investors pumped an outsized $126.5bn into exchange traded funds in March as a series of markets from Wall Street to gold hit record highs, according to data from BlackRock. The buying spree was the third-strongest monthly figure since 2021 — beaten only by a surge in inflows in the final two months of 2023. And even beyond the punchy headline reading there were further signs of bullishness with flows to equity ETFs at $96.6bn accounting for the vast majority of the tally.”

April 10 – Financial Times (Will Schmitt): “Flows to active US exchange traded funds have surged past previous records for both monthly and quarterly hauls, helping to drive assets held in the vehicles above $750bn at the end of March. Investors pumped $65.6bn into active ETFs in the three months to the end of March — more than 50% higher than the previous record of $41bn in the fourth quarter of 2023… The $27.2bn in flows garnered by active ETFs in March soared above previous monthly high water marks of $20.7bn, $17.6bn and $14.7bn, which were set in February, January and December, respectively.”

April 9 – Bloomberg (Jane Zhang): “Global venture capital funding declined 30% in the first quarter, continuing its slump as investors remain cautious amid sputtering economies and a sluggish market for stock-market debuts. China’s 40% decrease helped pull the market down, while the US saw a 29% drop, according to data collected by research firm Preqin. The overall worldwide haul by startups shrank to $57.8 billion in the first three months.”

AI Bubble Watch:

April 9 – Wall Street Journal (Peter Landers): “Chip-design company Arm made its name by devising ways to minimize smartphones’ power consumption and extend battery life. Now, the company’s head says the same push for energy efficiency is needed in artificial-intelligence applications… AI models such as OpenAI’s ChatGPT ‘are just insatiable in terms of their thirst’ for electricity, Haas said… ‘The more information they gather, the smarter they are, but the more information they gather to get smarter, the more power it takes.’ Without greater efficiency, ‘by the end of the decade, AI data centers could consume as much as 20% to 25% of U.S. power requirements. Today that’s probably 4% or less,’ he said. ‘That’s hardly very sustainable, to be honest with you.’”

Bank Watch:

April 12 – Bloomberg (Sridhar Natarajan): “Investors who plowed into shares of the largest US banks in recent months, hoping that slow Federal Reserve rate cuts would keep goosing profits, are getting a reality check. JPMorgan… and Wells Fargo… both reported net interest income — the earnings they generate from lending — that missed analysts’ estimates Friday, as executives pointed to increasing funding costs. At JPMorgan, NII slipped from the prior quarter for the first time in almost three years, with Chief Executive Officer Jamie Dimon predicting the bounty from elevated rates will normalize instead of soaring ever higher. Shares of the largest US bank fell the most since 2020.”

U.S./Russia/China/Europe Watch:

April 11 – Axios (Rebecca Falconer): “President Biden pledged… closer ties with Japan and the Philippines to counter China’s increasing influence in the Pacific… Biden and Japanese Prime Minister Fumio Kishida announced in D.C. new military, economic and other agreements ahead of their trilateral summit on Thursday with Philippines President Ferdinand Marcos Jr. Zoom in: ‘This is the most significant upgrade of our alliance since it was first established,’ Biden said… ‘For the first time, Japan and the United States and Australia will create a networked system of air, missile, and defense architecture.’”

April 11 – Financial Times (The editorial board): “Ever since it was announced in 2021, Aukus has attracted hostility and scepticism. China has consistently argued that the Australia-UK-US security pact is a dangerous move that raises regional tensions. Some western critics of Aukus suggest its central project, the provision of nuclear-powered submarines to Australia, may never happen… Despite these criticisms, Aukus is gaining momentum and adherents. Over the past week, the defence chiefs of the Aukus nations announced that they were considering inviting Japan to participate in the development of new military technology. Justin Trudeau, Canada’s prime minister, also spoke positively about developing ties with Aukus.”

April 6 – Bloomberg (Alberto Nardelli and Jennifer Jacobs): “The US is warning allies that China has stepped up its support for Russia, including by providing geospatial intelligence, to help Moscow in its war against Ukraine. Amid signs of continued military integration between the two nations, China has provided Russia with satellite imagery for military purposes, as well as microelectronics and machine tools for tanks, according to people familiar… China’s support also includes optics, propellants to be used in missiles and increased space cooperation, one of the people said.”

April 9 – Wall Street Journal (Austin Ramzy and Ann M. Simmons): “Russia and China have pledged to deepen their growing alliance and shared opposition to what they describe as the U.S.’s attempts to dominate the world order, with Moscow again seeking to boost trade with Beijing as it looks for new ways to bypass the Western sanctions imposed for its war on Ukraine. Russia’s Foreign Minister Sergei Lavrov met with Chinese leader Xi Jinping in Beijing… after the U.S. increased the volume of warnings that China should step back from helping the Russians pursue the war against their smaller neighbor… Lavrov echoed some of the language of the Cold War in his remarks following the discussions, and again criticized what he called the West’s proclivity for falling in behind Washington, and the U.S.’s attempts to get the rest of the world to follow the same line.”

April 9 – Bloomberg: “Russia and China agreed to start a dialogue on Eurasian security with the aim of ‘double counteracting’ the European-Atlantic alliance led by the US. ‘We have a common goal of increasing security in Eurasia,’ Russian Foreign Minister Sergei Lavrov said… at a press conference with his Chinese counterpart Wang Yi in Beijing. ‘We agreed with our Chinese friends to start a dialogue and get other like-minded countries to join us.’ Lavrov added that Wang proposed the idea of ‘double counteracting’ the US and its allies in response to the ‘double deterrence’ of Western countries against Russia and China.”

April 9 – Reuters (Guy Faulconbridge, Lidia Kelly and Andrew Hayley): “Russia and China have agreed to discuss ways to deepen security co-operation across Europe and Asia to counter attempts by the United States to impose its will on the region, Foreign Minister Sergei Lavrov said… after talks in Beijing. China and Russia declared a ‘no limits’ partnership in February 2022 when President Vladimir Putin visited Beijing just days before he sent tens of thousands of troops into Ukraine… Lavrov, after talks with Chinese counterpart Wang Yi, said that Putin had suggested strengthening Eurasian security and that China and Russia had agreed to ‘start a dialogue with the involvement of our other like-minded people on this issue’.”

April 11 – Financial Times (Edward White in Shanghai and Christian Davies): “Chinese President Xi Jinping has dispatched a senior official to Pyongyang to reassert China’s ‘deep friendship’ with North Korea… The visit by Zhao Leji, the third-ranking member of the Chinese Communist party’s leadership group, the politburo standing committee, marks the highest-level meeting between China and North Korea in nearly five years.”

De-globalization and Iron Curtain Watch:

April 12 – Bloomberg: “President Joe Biden has added more Chinese companies and individuals to an export blacklist than any US administration, as growing frictions between the world’s biggest economies continue to complicate global trade. The Commerce Department added six Chinese companies to its entity list on Thursday, bringing the tally of new targets during the Biden administration to 319. That compares to the 306 entities added during Donald Trump’s time in the White House…”

April 10 – Financial Times (Joe Leahy, Wenjie Ding and Anastasia Stognei): “China and Russia have pledged to maintain ‘industrial supply chain stability’ just days after US Treasury secretary Janet Yellen warned Beijing against supporting Moscow’s war effort. At a meeting in Beijing on Tuesday, Chinese foreign minister Wang Yi and his Russian counterpart Sergei Lavrov reinforced calls for their two countries to work more closely together against ‘hegemonism’, the Chinese foreign ministry said. ‘China and Russia will be more active in pursuing the convergence of their interests… and work together to maintain international industrial supply chain stability,’ a ministry statement quoted Wang as saying.”

April 9 – Wall Street Journal (Liyan Qi): “At the end of U.S. Treasury Secretary Janet Yellen’s visit to Beijing, Chinese officials pushed back against her urgings that China scale back its industrial production to avoid flooding world markets. Officials and state media defended China’s industrial policies and dismissed Western complaints that China is exacerbating overcapacity as protectionism and a pretext to suppress China’s rise. ‘The so-called overcapacity is the manifestation of the market mechanism that plays its role,’ Liao Min, deputy finance minister, said…”

April 11 – Reuters (Renju Jose): “New Zealand is facing the most unstable global environment in decades, Foreign Minister Winston Peters said…, as he pledged to boost ties with the United States amid conflicts in the Middle East and Ukraine. ‘We cannot afford to sit back in splendid isolation in the South Pacific, pontificate smugly, and talk exclusively to those countries we agree with,’ Peters said in a statement issued after his trip to the United States, Egypt and Europe.”

Inflation Watch:

April 10 – CNBC (Jeff Cox): “The consumer price index accelerated at a faster-than-expected pace in March, pushing inflation higher and likely dashing hopes that the Federal Reserve will be able to cut interest rates anytime soon. The CPI… rose 0.4% for the month, putting the 12-month inflation rate at 3.5%, or 0.3 percentage point higher than in February… Economists… had been looking for a 0.3% gain and a 3.4% year-over-year level. Excluding volatile food and energy components, the core CPI also accelerated 0.4% on a monthly basis while rising 3.8% from a year ago, compared with respective estimates for 0.3% and 3.7%.”

April 10 – CNBC (Brian Evans): “A hotter-than-expected consumer price index report rattled Wall Street Wednesday, but markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading. Along with the overall inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to find the true trend. The supercore gauge, which also excludes shelter and rent costs from its services reading, takes it even a step further. Fed officials say it is useful in the current climate as they see elevated housing inflation as a temporary problem… Supercore accelerated to a 4.8% pace year over year in March, the highest in 11 months.”

April 10 – Yahoo Finance (Dani Romero): “Housing costs remained elevated in March, raising concerns over when a recent easing of apartment rents will show up in the US government’s inflation data — and if the softening will hold. The shelter component of the Consumer Price Index… rose 0.4% over the previous month… Shelter costs rose 5.7% year over year, also flat from the previous month’s annual increase. ‘The monthly pace of shelter inflation has remained stubbornly elevated around 0.45% since last June despite market-based measures of rent growth cooling much more significantly over the past year,’ Parker Ross, global chief economist at Arch Capital Group, told Yahoo…”

April 11 – CNBC (Jeff Cox): “A measure of wholesale prices increased less than expected in March, providing some potential relief from worries that inflation will hold higher for longer than many economists had expected. The producer price index rose 0.2% for the month, less than the 0.3% estimate… and not as much as the 0.6% increase in February… However, on a 12-month basis, the PPI climbed 2.1%, the biggest gain since April 2023, indicating pipeline pressures that could keep inflation elevated.”

April 10 – Yahoo Finance (Brooke DiPalma): “Like the rest of inflation data, grocery prices are coming in hotter after slightly moderating last year. The cost of groceries remained flat in March and is up 1.2% year over year… This is the first month of year-over-year acceleration in US grocery prices since August 2022, breaking an 18-month streak of deceleration… Since COVID began in March 2020, the cost of food at home has jumped 24.6%.”

April 9 – Reuters (David Shepardson): “The United States Postal Service (USPS) said… it wants to raise the price of first-class mail stamps to 73 cents from 68 cents effective July 14. The proposal… would raise mailing services product prices by 7.8%. USPS in November reported a $6.5 billion net loss for the 12 months ending Sept. 30 as first-class mail fell to the lowest volume since 1968. Stamp prices are up 36% over the last four years since early 2019 when they were 50 cents.”

April 8 – Reuters (Michael S. Derby): “Americans’ outlook for inflation was mixed last month amid expectations for bigger price rises across a range of key goods and services, while worries about missing debt payments mounted, a report from the Federal Reserve Bank of New York said… The bank found in its March Survey of Consumer Expectations that the public sees inflation a year from now at 3%, unchanged from the prior month. The expected level of inflation three years from now rose to 2.9% from 2.7% in February, while five years from now inflation is seen at 2.6% from the prior month’s prediction of 2.9%.”

April 10 – Bloomberg (Alex Tanzi): “Floridians with homes in the ritziest neighborhoods that include Coral Gables and Naples are experiencing the nation’s biggest increases in real estate wealth as markets in the Sunshine State supplant those in California and New York at the top. In February 2020, before the pandemic, California was home to six of the 10 priciest neighborhoods in the country, while Florida and New York City had two each. Today, seven are located in Florida…”

April 11 – Wall Street Journal (Joseph Hoppe and Giulia Petroni): “Global prices for cocoa and coffee are surging as severe weather events hamper production in key regions, raising questions from farm to table over the long-term damage climate change could have on soft commodities. Cultivating cocoa and coffee requires very specific temperature, water and soil conditions. Now, more frequent heat waves, heavy rainfalls and droughts are damaging harvests and crippling supplies amid ever growing demand from customers worldwide… The spikes in prices are a threat to coffee and chocolate makers across the globe.”

Federal Reserve Watch:

April 10 – Bloomberg (Ye Xie): “To see how hard it’s been for even Wall Street’s best and brightest to predict where the Federal Reserve is headed, look no further than Goldman Sachs… As recently as November, the bank’s team of economists led by Jan Hatzius was bucking the broader consensus by predicting that the Fed would cut its benchmark rate by just a quarter percentage point in 2024… Then one month later, after the Fed signaled its was finally done hiking, Hatzius and his colleagues changed their call sharply, expecting five such reductions, with the first in March… Now, with another higher-than-expected consumer price index jump causing a reset on Wall Street, Hatzius’s team — like others — revised its call yet again: They now expect only two cuts this year, with the first move coming in July, followed by another in November.”

April 10 – Bloomberg (Christopher Anstey and Jarrell Dillard): “Former Treasury Secretary Lawrence Summers said that the hot US consumer price inflation report for March means that the risk case of the next Federal Reserve move to be an increase must be taken seriously. ‘You have to take seriously the possibility that the next rate move will be upwards rather than downwards,’ Summers said… He indicated that such a likelihood is somewhere in the 15% to 25% range.”

April 10 – Bloomberg (Craig Torres and Alexandra Harris): “Federal Reserve policymakers ‘generally favored’ slowing the pace at which they’re shrinking the central bank’s asset portfolio by roughly half, minutes from their latest gathering showed. The record of the March 19-20 Federal Open Market Committee meeting also showed ‘almost all’ officials judged it would be appropriate to begin lowering borrowing costs ‘at some point’ this year. However, inflation data since then has upended expectations for three interest-rate cuts this year. Policymakers ‘noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven,’ according to the meeting minutes…”

April 11 – Bloomberg (Alexandra Harris): “Federal Reserve Bank of New York President John Williams said the central bank has made ‘tremendous progress’ toward better balance on its inflation and employment goals, but added there’s no need to cut in the ‘very near term.’ Williams… said inflation still has ‘a ways to go’ to get to the Fed’s 2% goal. He added monetary policy is in a good place, and the labor market remains strong. ‘There’s no clear need to adjust policy in the very near term,’ Williams said… ‘As we collect more data, we’ll be able to assess have we got that confidence that inflation is moving back to 2%.’”

April 11 – Bloomberg (Alexandra Harris): “Federal Reserve Bank of Boston President Susan Collins said it may take more time than previously thought to gain the confidence to begin easing policy, possibly warranting fewer rate reductions this year. Collins said recent data have eased concerns about an ‘imminent need’ to adjust interest rates, though she still expects cuts to begin later this year. ‘Overall, the recent data have not materially changed my outlook, but they do highlight uncertainties related to timing, and the need for patience — recognizing that disinflation may continue to be uneven,’ Collins said…”

April 8 – Bloomberg (Katia Dmitrieva and Haslinda Amin): “Former Federal Reserve Bank of St. Louis President James Bullard said he’s expecting three interest-rate cuts this year as inflation moves toward the central bank’s target while the economy remains resilient. ‘At this point, you should probably take the committee and chair at face value — their best guess right now is still three cuts this year,’ Bullard said… ‘That’s the base case.’ ‘You’re looking at a very successful policy with a pretty strong economy, so a lot of things going right for the Fed right now,’ he said…”

Biden Administration Watch:

April 6 – Financial Times (Henry Foy, Felicia Schwartz, Demetri Sevastopulo, and Claire Jones): “The US has warned of ‘significant consequences’ if Chinese companies provide support for Moscow’s war against Ukraine in one of the sharpest messages it has yet delivered to Beijing. Following discussions in Guangzhou…, ‘Secretary Yellen emphasised that companies, including those in the PRC, must not provide material support for Russia’s war against Ukraine… and the significant consequences if they do so.’ Janet Yellen’s warning comes after secretary of state Antony Blinken told EU and Nato foreign ministers that Beijing was assisting Moscow ‘at a concerning scale’, and providing ‘tools, inputs and technical expertise’…”

April 11 – Financial Times (Demetri Sevastopulo): “President Joe Biden has told Ferdinand Marcos Jr that the US-Philippines alliance was ‘ironclad’, stressing that their mutual defence treaty applied to attacks on Filipino armed forces, in a warning to China. Following a bilateral meeting, the White House said the leaders had ‘underscored their commitment to international law in the South China Sea’. ‘President Biden reinforced the ironclad US alliance commitment to the Philippines under the US-Philippines Mutual Defense Treaty, which extends to armed attacks on Philippine armed forces, public vessels or aircraft — to include those of its Coast Guard — in the Pacific, including anywhere in the South China Sea,’ the White House said.”

April 8 – Financial Times (Demetri Sevastopulo): “President Joe Biden will warn China about its increasingly aggressive activity in the South China Sea this week during summits with Japanese Prime Minister Fumio Kishida and Philippine President Ferdinand Marcos Jr. Two senior US officials said Biden would express serious concern about the situation around the Second Thomas Shoal, a submerged reef that is one of many contested features in the Spratly Islands. The Chinese coastguard has used water cannons to prevent the Philippines from resupplying marines stationed on the Sierra Madre, a rusting ship that Manila intentionally grounded on the reef in 1999 in an effort to reinforce its claims to the feature.”

April 8 – CNBC (Karen Gilchrist and Ruxandra Iordache): “U.S. Treasury Secretary Janet Yellen on Monday said she would not rule out any measures, including potential tariffs, on China’s green energy exports. ‘I wouldn’t rule out anything out at this point. We need to keep everything on the table. We want to work with the Chinese to see if we can find a solution,’ she said… when asked about the possibility of Washington imposing tariffs if China does not adjust its approach to industry incentives.”

April 8 – Financial Times (Gideon Rachman): “Fumio Kishida lacks charisma and is unpopular at home. But when the Japanese prime minister visits Washington this week, he will receive a hero’s welcome. The popularity of Kishida with the Biden administration goes well beyond routine backslapping for a close ally. Under him, Japan has made some of the most important changes in its foreign and security policies since the second world war. These shifts are driven by Japan’s determination to prevent an authoritarian China from dominating the Indo-Pacific.”

U.S. Economic Bubble Watch:

April 9 – Reuters (Lucia Mutikani): “U.S. small-business confidence slipped to the lowest level in more than 11 years in March amid rising concerns about inflation… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 0.9 point to 88.5 last month, the lowest level since December 2012. It was the 27th straight month the index was below the 50-year average of 98. Twenty-five percent of owners reported inflation was their single most important problem in operating their business, reflecting higher input and labor costs, up 2 points from February. The share of businesses raising average selling prices rose 7 points from the prior month.”

April 9 – CNBC (Ana Teresa Solá): “There is a record number of areas in the U.S. where the ‘typical’ home is worth $1 million or more. In February, the country had 550 ‘million-dollar’ cities, or areas where the ‘typical’ home value is $1 million or more, according to… Zillow. That is a gain of 59 cities from 2023, and edges out the previous record of 522 such cities when home values peaked in 2022. The boost in million-dollar cities is a result of the mortgage lock-in effect, which deterred homeowners with extremely low rates from listing their properties for sale, said Skylar Olsen, chief economist at Zillow. The dynamic is keeping supply limited in some markets and elevating sale prices for those few available properties.”

April 10 – Bloomberg (Alex Tanzi): “US credit-card delinquency rates were the highest on record in the fourth quarter, according to a Federal Reserve Bank of Philadelphia report. Almost 3.5% of card balances were at least 30 days past due as of the end of December… That’s the highest figure in the data series going back to 2012, and up by about 30 bps from the previous quarter. The share of debts that are 60 and 90 days late also climbed. ‘Stress among cardholders was further underscored in payment behavior, as the share of accounts making minimum payments rose 34 bps to a series high,’ according to the report. Nominal credit card balances set a new series high and card utilization also rose, as consumers stretched credit lines further.”

April 10 – Bloomberg (Michael Sasso): “US mortgage rates last week topped 7% for the first time in a month, while home purchase applications fell by the most since mid-February. The contract rate on a 30-year fixed mortgage rose 10 bps to 7.01% in the week ended April 5… That depressed the group’s index of mortgage applications for home purchases, which slipped 4.7% to the lowest level in a month.”

Fixed Income Watch:

April 11 – Bloomberg (Jill R. Shah): “The percentage of companies that have defaulted on their debt more than once has reached its second highest level since 2008, according to… S&P Global Ratings. Around 35% of total global defaults in 2023 were by issuers that are ‘re-defaulters,’ a trend that’s also dampening recoveries, Nicole Serino, director of credit research and insights… said… That’s in part because of an increase in the number of issuers with ratings of B- or below, which have high levels of debt. ‘These capital structures were set up during times of lower rates and in anticipation of lower rates,’ Serino said… ‘You saw that bubble grow, and grow, and grow.’”

China Watch:

April 10 – Financial Times (Cheng Leng and William Sandlund): “Fitch Ratings cut its outlook on China’s long-term credit rating to negative…, citing uncertain prospects for the economy as the country transitions from its property-led growth model. The move by Fitch, which maintained the country’s A plus credit rating, follows a similar outlook downgrade from rival Moody’s Ratings in December. ‘The outlook revision reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model,’ the agency said.”

April 12 – Bloomberg (Rachel Yeo and Li Liu): “Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China say Central Huijin Investment, the nation’s sovereign wealth fund, will continue to support their development, according to separate filings.”

April 11 – Bloomberg: “A number of Chinese state banks are making their strongest effort yet to encourage credit officers to approve loans for developers, in a bid to heed the government’s call to prop up the embattled real estate market. State lenders including Industrial and Commercial Bank of China Ltd. are telling the officers they won’t be held responsible if property loans eventually turn non-performing, people familiar… said. The directives… underscore the tricky balancing act faced by banks as they try to follow Beijing’s calls for support while protecting their own balance sheets.”

April 10 – Reuters (Joe Cash): “China’s consumer inflation cooled more than expected in March, while producer price deflation persisted… Worrying deflationary pressures in the world’s second-largest economy appear to be slowly easing, though a protracted property crisis is still weighing heavily on consumer and business confidence. Consumer prices rose by a muted 0.1% in March from a year earlier…, versus a 0.7% rise in February which was the first gain in six months and a 0.4% rise in a Reuters poll.”

April 9 – Bloomberg (Toru Fujioka): “Shares and bonds of China Vanke Co. extended declines in afternoon trading as the developer said a regional manager in the city of Jinan was assisting an investigation. The stock closed down 5.1% in Shenzhen at its lowest level since May 2014… A regional manager, Xiao Jing, is cooperating in a probe over ‘personal reasons,’ the company’s Jinan unit said. While Vanke offered few details, the news came after the developer denied allegations made by some Shandong-based partner companies over the company and its chairman. The accusations included money laundering and tax evasion.”

April 11 – Bloomberg: “Chinese property developers slide as Vanke’s credit rating downgrade and weak March home sales reported by a number of companies deepen worries about the sector. ‘Vanke’s crisis would be the biggest swing factor to new home sales this year, just see how Country Garden’s non-payment deepened the sales downturn since August 2023,’ Bloomberg Intelligence analyst Kristy Hung says. Investigations into Vanke’s personnel and more rating cuts just add to the list of red flags on the company…”

April 7 – Bloomberg (Lorretta Chen and Felix Tam): “Defaulted Chinese developer Shimao Group Holdings Ltd. is facing a demand to liquidate from creditor China Construction Bank (Asia) Corp., one of the most prominent examples yet of a state-backed bank trying to claw back money from a distressed developer.”

Central Banker Watch:

April 11 – Financial Times (Martin Arnold and Mary McDougall): “The European Central Bank sent a strong signal that it would consider cutting interest rates at its next meeting in June after holding them at all-time highs on Thursday. The ECB said after its governing council met in Frankfurt that its benchmark deposit rate would stay at 4% until rate-setters were sure price pressures had stabilised. But its president Christine Lagarde told reporters that a small minority of policymakers had argued for an immediate cut. In a shift from previous language, the ECB said it ‘would be appropriate’ to cut rates if underlying price pressures, its updated forecasts and the impact of previous rate rises increased its confidence that inflation was closing in on its 2% target ‘in a sustained manner’.”

Global Bubble Watch:

April 9 – Bloomberg (Betty Hou): “From early morning to late night, growing numbers of Taiwanese find themselves glued to YouTube videos, Facebook groups or online forums offering tips about exchange-traded stock funds. With much—in some cases all—of their savings sitting in ETFs tracking Taiwanese equities, they’re terrified of missing an opportunity to reap what they’re convinced will be fat profits. ‘Everyone’s talking about ETFs,’ says Annie, a former administrative assistant in Taipei who has plowed her entire NT$3 million ($93,000) retirement account into the funds. ‘My children told me this was stupid, but now they’ve all invested too.’”

Europe Watch:

April 9 – Wall Street Journal (Martin Arnold): “Eurozone banks reported a ‘substantial’ drop in loan demand from companies, prompting calls for the European Central Bank to signal it will cut interest rates soon when it meets this week. The ECB said… its quarterly survey of lenders showed ‘demand for loans from firms declined substantially, contrary to banks’ expectations of a recovery’. Economists said the fall in borrowing… meant the region’s economy was likely to continue stagnating. However, there were also signs of banks starting to stabilise the availability of credit to the economy in the first three months of this year, following a four-year tightening period, as they cut the cost of mortgages for the first time in more than two years.”

April 8 – Reuters (Christoph Steitz): “Investor morale in the euro zone improved for the sixth consecutive month in April to its highest level in more than two years…, adding that even though Germany remained a drag it showed ‘economic signs of life’ Sentix’s index for the euro zone rose to -5.9 points in April from -10.5 in March, its highest level since February 2022…”

Japan Watch:

April 9 – Reuters (Leika Kihara): “Bank of Japan Governor Kazuo Ueda said the central bank must consider whittling down stimulus further if inflation continues to accelerate, signalling the chance of another interest rate hike later this year in line with market bets. Speaking in parliament, Ueda said the central bank must maintain ultra-loose monetary policy for the time being since trend inflation has yet to reach its 2% target. But he said solid pay hikes seen so far in this year’s wage negotiations will likely boost household income and consumption, offering an upbeat view on Japan’s economic outlook.”

April 9 – Bloomberg (Toru Fujioka): “Governor Kazuo Ueda said the Bank of Japan won’t change policy in direct response to currency moves, a comment that comes as market players await US inflation data that may tip the yen past a threshold risking currency intervention by Japan’s government. ‘We won’t consider changing monetary policy at all to directly respond to moves in foreign exchange,’ Ueda said… Still, the central bank will keep an eye on the impact of the weak yen on the economy and inflation dynamics, he added.”

April 7 – Bloomberg (Masaki Kondo): “A gauge for investor expectations of Japan’s inflation matched a record high as a weak yen keeps upward pressure on the cost of living. The difference in yields between nominal 10-year government notes and securities linked to a change in consumer prices has widened about a quarter percentage point this year to 1.418%, matching a record high set in November…”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 9 – Reuters (Kate Abnett): “The world just experienced its warmest March on record, capping a 10-month streak in which every month set a new temperature record, the European Union’s climate change monitoring service said… Each of the last 10 months ranked as the world’s hottest on record, compared with the corresponding month in previous years, the EU’s Copernicus Climate Change Service (C3S) said in a monthly bulletin. The 12 months ending with March also ranked as the planet’s hottest ever recorded 12-month period, C3S said. From April 2023 to March 2024, the global average temperature was 1.58 degrees Celsius above the average in the 1850-1900 pre-industrial period.”

April 9 – New York Times (Kenza Bryan and Steven Bernard): “Record sea temperatures over an unprecedented stretch and on land for the tenth month in a row have unnerved climate scientists, driving the global average temperature rise beyond 1.5C since pre-industrial times. Sea surface temperatures in March at 21.07C were the warmest on record for the 12th month in a row, Europe’s Earth observation agency said, confounding its climatologists. ‘Myself and other climate scientists are asking whether this year is a blip, a phase change, whether the climate system is broken and behaving in a different way to what we expect,’ said Samantha Burgess, deputy director of the Copernicus Climate Change Service.”

April 10 – Bloomberg: “Global coal-power capacity rose to a record last year, led by a surge in new plants in China and a slowdown in retirements around the world, according to… Global Energy Monitor. The world’s coal fleet grew by 2% to 2,130 gigawatts, with China accounting for about two thirds of the increase followed by Indonesia and India, according to the climate research firm. China also started construction on 70 gigawatts of new coal plants last year, nearly 20 times more than the rest of the world combined.”

Geopolitical Watch:

April 6 – Reuters (Neil Jerome Morales and Brenda Goh): “The Philippines and China traded accusations… over an encounter in disputed waters of the South China Sea, in an escalating row over a key waterway. Manila said two Chinese coast guard vessels ‘harassed’ Filipino fishing vessels within the Philippines’ exclusive economic zone, while Beijing said its vessels responded appropriately to illegal activities. China claims almost the entire South China Sea… including parts claimed by the Philippines, Vietnam, Indonesia, Malaysia and Brunei. The Permanent Court of Arbitration in 2016 said China’s claims had no legal basis.”

April 12 – Reuters (David Brunnstrom and Simon Lewis): “The Philippines is determined to assert its sovereign rights in the South China Sea, its foreign secretary said… at a meeting with U.S. allies to show support for Manila over an increasingly fraught standoff with China in the strategic waterway. Speaking at the U.S. State Department, Enrique Manalo accused China of ‘escalation of its harassment’ of the Philippines, while U.S. Defense Secretary Lloyd Austin said Washington stood with Manila against what he described as ‘coercion.’”

April 9 – Wall Street Journal (Niharika Mandhana): “China is intensifying a dangerous game in the South China Sea, in ways that risk drawing the U.S. into its fight with the Philippines. In early March, two Chinese coast guard ships slammed a Philippine boat with high-pressure blasts of water cannon, smashing its windshield and preventing it from delivering supplies to a military outpost. A few weeks later, during another Philippine resupply run, Chinese water cannons hit the boat again, leaving its interior in shambles and injuring three Filipino navy personnel. The tactics… are designed to make it more difficult for Manila to maintain the outpost at Second Thomas Shoal. China claims the reef as its own along with much of the strategic waterway.”

April 9 – Bloomberg (Karishma Vaswani): “Where could the US and China find themselves in a direct confrontation? Taiwan is the obvious answer: President Xi Jinping has said the island will eventually be unified with the mainland, either through peaceful means or by force. In fact, there was so much concern about the possibility of a conflict that The Economist called Taiwan ‘the most dangerous place on earth’ in 2021. For now, though, military experts agree that an invasion is not imminent… Instead, the world’s most dangerous place moniker belongs to the South China Sea. Right now, the risk of conflict between Beijing and Washington is highest in the troubled waterway. It is why the US, Japan, Australia and the Philippines have been holding naval and air exercises this week, and on Thursday, leaders of three of the four countries will cement their ties even further. The closer partnership has already resulted an open discussion about Japan joining part of the Aukus security pact… These moves will no doubt anger China…”

April 9 – Financial Times (Henry Foy): “Europe must prepare for potential war, as a full-scale conflict on the continent beyond Ukraine is ‘no longer a fantasy’, the EU’s chief diplomat has warned. ‘Russia threatens Europe,’ both through its ongoing war in Ukraine and hybrid attacks on EU member states, Josep Borrell said… ‘War is certainly looming around us,’ said Borrell. ‘A high-intensity, conventional war in Europe is no longer a fantasy.’ It is the first time the former Spanish foreign minister has laid out the Russian threat so explicitly…”

April 8 – Bloomberg (Enda Curran, Natalia Drozdiak and Bhargavi Sakthivel): “A new era of global rearmament is gathering pace, and it will mean vast costs and some tough decisions for western governments already struggling with shaky public finances. Despite world defense spending reaching a record $2.2 trillion last year, European Union nations have only just begun to consider what 21st-century security will require with an aggressive Russia stirring on their eastern borders, a volatile Middle East, and the expansion of the Chinese military tugging Washington’s attention toward the Pacific… ‘The post-Cold War ‘peace dividend’ is coming to an end,’ said Jennifer Welch, BE’s chief geoeconomics analyst. ‘That’s likely to have a transformative effect on defense companies, on public finances and on financial markets.’”

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